Convertible Bonds Pricing Model Under Heterogeneous Investors And Its Optimal Strategy Analysis

With the continuous progress of the opening-up during the last twenty years, the roleof the capital market in China has become more and more important which will be thesolid foundation for further innovative development.To develop multi-kinds of derivatives including convertible bonds is not only for theneed of the development of capital market but also for the need of risk management ofinvestors. This process will play an important role in many aspects, such as perfect marketstructure, enrich tradable products, fasten the reform of financial system and strengthenthe anti-risk ability of investors. From the perspective of overseas market, convertiblebond is useful for the prosperity of financial market and the promotion of enterprisecompetitiveness which will enhance the elasticity and flexibility of the whole marketeffectively. In the other hand, the prosperity of the convertible bond is also helpful to solveChinese capital market troubles such as extortionate stock financing ratio, lack ofinvestment tools and financial innovation.However, the characteristics of uncertainty, nonlinear and exotic deep inside in theconvertible bonds puls the interaction of the additional clauses make it difficult to priceand analyze properly. Thus, the valuation, numerical implementation and optimal strategyanalysis are still hot issues in relevant fields. Furthermore, the handicap in the short ofdata sample due to the young age of Chinese convertible market, only few formerliteratures deal with the empirical study on the call strategy and call announcement effectsin domestic market. Therefore, a deep study on convertible bond pricing models,numerical implementation techniques and empirical study is conceded in this dissertation.Firstly, based on the method of option game, a valuation model for convertible bondswhich takes the characteristics of game between the bonds issuer and holder into accountis built, and then numerical solution of the model through finite element method is derivedcorrespondly. On the basis of that, the impacts of several additional clauses on the choiceof optimal strategy are analyzed.Secondly, an empirical study on the call strategy in Chinese market is conducted.Through the comparison of the theoretical results derived from the model proposed in the first part and the actual redemption results in the market, the validity of the model isexamined. The results shows the model proposed in this dissertation can reflect the marketphenomenon better than former literatures. In addition, some high degree of call late stillneeds further explanation which leads to the third part of the dissertation.Thus, under the framework of behavioral finance, this dissertation use the regretaversion to stand for the heterogeneous beliefs of investors and a revised pricing model isconstructed subsequently. Focusing on the call strategy, the impact of investors’heterogeneous belief on the convertible bonds is analyzed. Results of theoretical modeland numerical simulation both point out that the regret aversion of convertible bondsissuers could explain call strategy of convertible bonds late(early) properly.Finally, the call announcement effects of convertible bonds in Chinese market areexamined. The analysis on the cumulative abnormal returns finds only little support for theliquidity hypothesis, especially the price reversion predicted by the liquidity hypothesisdoesn’t show up in the test. On the other hand, the hypothesis of asymmetry informationseems more robust than liquidity hypothesis in our results.In general, the results proposed in this dissertation will provide some help forunderstanding the characteristic of convertible bonds better and promote the developmentof convertible bonds markets in China.